China just published a nasty warning to traders around the world

That's the message to yuan traders around the world the Chinese
government just published in state media outlet, Xinhua.

Stupid, to the Chinese government in this context, simply means
having the nerve to short the yuan, the country's currency.

The yuan has been depreciating in value steadily since December,
becoming a source of volatility in global markets. This runs
counter to the government's desire to let the currency stabilize.

That's why, in an editorial
written by a known alias of the Chinese government,
authorities told the shorts to drop dead [emphasis ours].

Some people believe that the Chinese capital market is
experiencing a major crisis, of which they try to take advantage
with speculative actions and even vicious shorting activities.

The latest example is that some radical speculators tried to
short sell the Chinese currency yuan, which has been depreciating
against the U.S. dollar recently. However, with the Chinese
monetary authority taking effective measures to stabilize the
value of the yuan, those speculators are expected to
suffer huge losses.

The Chinese economy is transitioning from one based on
investment, to one based on domestic consumption. Old industries,
like manufacturing and property, are declining and the economy is
slowing. This has put pressure on the yuan at a time when the
government wants to portray stability.

Authorities see this as a temporary phase in China's economic
development — one in which the market's free hand cannot be
allowed to guide the economy quite yet. That's why they're
warning currency traders to back off and stop selling the yuan.

The editorial frames this as a longterm bet no investor would
want to lose:

A smart, far-sighted investor would seize the opportunity arising
from China's economic restructuring, and achieve a win-win
outcome by investing in China's future and reaping the fruits of
China's reform and robust new economy.

As for those who want to bet on the "ultimate failure" of the
Chinese economy, they should look back at the past four decades,
which witnessed China's growth from an underdeveloped economy
into a global economic powerhouse through continuous reform and
opening up.

REUTERS/Paul Yeung

Not a threat, a promise

China isn't kidding about what it can do to traders either.
Earlier this month we saw what happened when the government
decided to run yuan shorts out of the market — the shorts got
killed.

First, a primer: There are two kinds of yuan — the onshore yuan,
which is controlled by the government, and the offshore yuan,
which floats more freely in the market. The spread between the
two yuan has become
a source of global volatility. It shows the market that the
onshore yuan either is or is not fair value — that the government
is or is not manipulating price.

During the week of January 12, China said no more, and
went into the offshore market, which is mostly traded in Hong
Kong, and bought up a ton of yuan. That drove the cost of
borrowing yuan up sharply.

Liquidity dried up. The Hong Kong Interbank Offering rate, or
Hibor — the benchmark rate at which banks will lend to one
another —
shot up from 4% to 66.8% in 2 days. The shorts were murdered.

“It looks like PBoC wants to maintain a high cost of shorting
CNH,” Zhou Hao, Asia economist at Commerzbank in Singapore,
told The Financial Times.